Britain is to cut its spending on overseas aid by £1.164bn over the next three years as funds are diverted towards projects in Britain.

George Osborne announced that the government would meet the UN target of spending 0.7% of gross national income (GNI) on overseas aid by 2013. A slowing of the economy meant it would have exceeded the 0.7% target without the reductions.

The Department for International Development confirmed its budget, due to be £30.73bn between next April and April 2015, would be cut by £1.164bn in the following stages:

• The planned budget of £8.56bn for 2012-13 will be reduced to £8.18bn, a saving of £377m. The target to spend 0.56% of GNI on aid will still be met this year.

• The planned budget of £11.02bn for 2013-14 will be reduced to £10.77bn, a saving of £264m. The target to spend 0.7% of GNI on aid on will still be met this year.

• The planned budget of £11.15bn for 2014-15 will be reduced to £10.62bn, a saving of £523m. The target to spend 0.7% of GNI on aid will still be met this year.

The chancellor said: "This government will stick by the commitments it has made to the poorest people in the world by increasing our international development budget – and the whole house should be proud of the help our country is providing to eradicate disease, save lives and educate children. But the spending plans of the Department for International Development meant that the UK was on course to exceed 0.7% of national income in 2013. That I don't think can be justified and so we are adjusting those plans so we don't overshoot the target." Some of the savings will be used to fund current spending on youth projects. The chancellor told MPs that most of the savings in current spending, such as the DfID reductions, would be used to fund capital projects.

Claire Godfrey, Oxfam's senior policy adviser, said: "We are disappointed that lower than expected UK growth means the world's poorest people will get less help, especially as they are already suffering in an economic crisis they did nothing to cause. But ministers deserve credit during these difficult economic times for sticking to their commitment to invest 0.7% of national income in aid. We expect the government to reverse these cuts if growth exceeds expectations."

Brendan Cox, director of policy and advocacy at Save the Children, said: "We welcome the government's continuing commitment to meet their international pledge on the 0.7% target, in spite of tough times. This will mean millions of lives saved in countries where the impact of the global downturn may be greatest."